Fee versus royalty licensing in a Cournot duopoly with increasing marginal costs

Abstract

We consider a symmetric homogeneous Cournot duopoly operating under increasing marginal costs. One of the firms owns a patented superior technology that reduces the intercept of the marginal cost function. We compare the incentives of the insider patentee to license the technology to the rival firm either through a fixed fee or through a royalty. We obtain that royalty licensing does not necessarily dominates in our setting: when decreasing returns are important, a royalty is superior only for small enough innovations, whereas a fixed fee is chosen for large innovations. Aditionally, we show that our model is able to replicate the results in Wang (2002), which analyzes the same question in a differentiated duopoly with constant marginal costs.

Strategic analysis of green technology unilateral licensing under carbon cap‐and‐trade policy

“…Moreover, many scholars have conducted studies to various internal factors. For example, Fauli‐Oller and Sandonís (2022) showed that royalty is only superior to fixed‐fee licenses in small innovations when diminishing returns become important. Hong et al (2022) found that, in addition to innovativeness of patentees, absorptive capacity of licensees may significantly affect licensing strategy and patentees may prefer unit royalty licenses and two‐part ad valorem licenses to fixed‐fee licensing contracts.…”